Understanding the two options
A remortgage for debt consolidation involves replacing your entire existing mortgage with a new, larger one. The additional borrowing covers the debts you want to consolidate. You end up with a single mortgage from a single lender.
A second charge mortgage, also known as a secured loan, sits alongside your existing mortgage without replacing it. You borrow against the equity in your property through a separate agreement with a different lender. You then have two secured loans against your property: your original mortgage (first charge) and the new secured loan (second charge).
When a remortgage is usually better
Your current deal is ending
If your existing fixed rate or tracker deal is coming to an end and you would be moving to your lender's standard variable rate anyway, remortgaging to consolidate debt is often the most cost-effective option. You are already going through the process of finding a new deal, so adding debt consolidation to the remortgage is a natural extension.
Low or no early repayment charges
If your current mortgage has no ERCs, or the charges are minimal, the cost of switching is low. In this case, a remortgage typically offers a lower interest rate than a second charge mortgage, making it the cheaper option overall.
You want the simplicity of one payment
A remortgage results in a single monthly payment to a single lender. A second charge means two separate payments to two different lenders, which adds complexity to your monthly budgeting. For some borrowers, the simplicity of one payment is a significant advantage.
You can access better rates
First charge mortgage rates are generally lower than second charge rates. If you have good credit and sufficient equity, the rate on a new remortgage for debt consolidation will typically be lower than the rate on a second charge mortgage for the same purpose.
When a second charge is usually better
You have a competitive existing rate
This is the single most common reason to choose a second charge over a remortgage. If your existing mortgage is on a low fixed rate, say 2.5% secured before rates rose, replacing it with a new mortgage at 5% or higher would significantly increase your overall borrowing costs. A second charge lets you keep the low rate on your existing mortgage and only pay the higher rate on the additional borrowing for debt consolidation.
Significant early repayment charges
If your current mortgage carries substantial ERCs, often 3% to 5% of the outstanding balance in the early years of a fix, the cost of breaking the deal can be thousands of pounds. A second charge avoids these charges entirely because your existing mortgage remains untouched.
You are within a fixed-rate period
Even if the ERCs are not prohibitive, being part way through a favourable fixed-rate period may mean it makes sense to wait until the deal ends before remortgaging. A second charge provides access to funds for debt consolidation now without disrupting the existing deal.
Your existing lender will not consolidate
Some lenders are reluctant to approve additional borrowing for debt consolidation, particularly if you have credit issues. In these cases, a second charge from a different lender can achieve the consolidation without requiring your existing lender's cooperation.
Comparing the costs
The cost comparison between a remortgage and a second charge depends on several variables. Consider a homeowner with a £200,000 mortgage at 2.5% fixed for three more years, wanting to consolidate £25,000 in debt.
Remortgage scenario
Breaking the existing deal incurs ERCs of, say, 3% on £200,000, which is £6,000. The new mortgage of £225,000 at 5% costs £1,318 per month over 20 years. Total cost of remortgaging includes the £6,000 ERC, arrangement fees of approximately £1,000, legal fees of approximately £500, and the higher rate on the full £225,000.
Second charge scenario
The existing mortgage continues at £200,000 at 2.5%, costing approximately £1,060 per month. A second charge of £25,000 at 7.5% over 15 years costs approximately £232 per month. Total monthly cost is £1,292, which is lower than the remortgage scenario. There are no ERCs, and the existing low rate is preserved on the majority of the borrowing.
In this example, the second charge is clearly the better financial choice, even though the rate on the second charge is higher. The crucial factor is that the low rate on the existing £200,000 is preserved.
Factors that affect the decision
- Remaining term on your current deal: The longer you have left on a competitive deal, the stronger the case for a second charge.
- Size of the debt to consolidate: For very large consolidations, a remortgage may be more practical as second charge amounts are sometimes capped.
- Your credit history: Different lenders in the first and second charge markets have different criteria. A broker can advise which market offers better options for your credit profile.
- Your equity position: Both options require equity, but the LTV calculations differ. The combined LTV of both first and second charge is assessed for a second charge application.
- Total cost over the full term: Always compare the total cost of each option, not just the monthly payment.
Can you have both?
Some borrowers use a combination approach. They might take a second charge now to consolidate urgent debts while their existing mortgage deal runs, then remortgage at the end of the deal period to consolidate the second charge into a single, lower-rate mortgage. This requires careful planning but can be the most cost-effective approach in certain circumstances.
Getting the right advice
A specialist debt consolidation broker will calculate the total cost of both options for your specific circumstances, including ERCs, fees, interest rates, and total interest over the full term. They have access to both the first charge (remortgage) and second charge (secured loan) markets and can recommend the option that genuinely costs you least.
Nesto matches you with an FCA-regulated debt consolidation broker for free, with no obligation. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.